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IQ-EQ talks impact investing with LeapFrog’s Clare Murray

Making an impact

Impact investing is a hot topic across the investment industry at present, and will only become more prominent as the next generation rises through the ranks and ever-greater focus is placed on the social and environmental impact of business activities.

One expert in the impact investing space is Clare Murray, associate director at LeapFrog Investments. Having started out her career at Goldman Sachs in New York, Clare was first introduced to the concept of responsible investing after moving to BlackRock in 2012, where she worked closely with family offices, family foundations and endowments. As more and more clients expressed interest in aligning their investment activity with a purpose mission, Clare was among the team who worked to bring BlackRock’s various related functions together in order to establish the BlackRock Sustainable Investment Platform. With her impact investing interest peaked, Clare went on to join LeapFrog, a leading impact investment firm, in 2017.

Having been introduced to Clare through IQ-EQ’s Women in Private Equity event earlier this year, directors Tom Miller and Emmanuelle Dotezac recently sat down with Clare in London to talk all things impact investing. Here’s what she had to say.

Please could you start by telling us a little bit about LeapFrog?

LeapFrog Investments is a private equity firm that has been in the impact investment space for the past 10 years. We use the phrase “profit with purpose”, but as the term “impact investing” has entered the mainstream, we have started using that terminology as well. At LeapFrog we invest in companies that provide essential services and products to emerging consumers; in other words, people living on $2-10 a day. We are very focused on that consumer segment. In terms of sectors, we invest in healthcare and financial services across emerging markets in Asia and Africa.

In your view, how important is impact investing in today’s society and what are the key benefits for investors?

It is really exciting to watch how much this space has grown in the past decade – or even in the past couple of years. There has been a significant demand for investments that generate positive social good alongside meaningful financial returns and this has led to an explosion in impact investing. There are a number of drivers contributing to this trend including an increase in female asset owners and by Millennials taking over assets. At the top as well you have the United Nations calling for a significantly more private sector involvement to help reach their Sustainable Development Goals (SDGs) by 2030. There’s a real public and private push towards a more defined and measureable approach to impact investing, which will only intensify.

The global pools of capital dedicated to impact investments continue to grow as well. The Global Impact Investing Network (GIIN) recently estimated the current value of global impact investments as $502 billion, up from $114 billion in 2016. That’s almost five-times growth in just three years.

In terms of the key benefits for the investors, I think there are a number. There’s an alpha opportunity there; an ability to generate strong performance returns. There is also the feeling of doing more with your money, which is proving a crucial factor in achieving engagement from the millennial generation and therefore retaining relationships with family offices as Millennials take over family assets and generate their own wealth too.

Sometimes in our conversations with industry peers and clients we find that the terms ‘impact investing’ and ‘ESG’ are used almost interchangeably. Could you help shed some light on the key differences between the two concepts?

Yes, with the way this sphere has evolved there’s a lot of confusion around the terminology being used, but ESG and impact investing – while in the same universe – are very different. In my mind, ESG-focused investments are when environmental, social and governance factors are considered and integrated across the investment process to drive better outcomes – both in terms of earnings and limitation of risk. Whereas impact investing focuses on the outcome; the explicit goal of making a positive social or environmental impact as well as a financial return. In short, ESG is more about integration and best practice while impact is about targets and outcomes.

So one is the system and one is the end goal; how you invest versus what you invest in.

That’s right. You would imagine that impact funds or companies that consider themselves focused on impact would have high-quality E, S and G factors within their organisation too.

Are you finding that the rising emphasis on ESG factors in investment activity is driving a greater interest in impact investing?

Yes. It’s the same wave bringing impact investing and ESG integration to the fore and into the mainstream. We’ve seen a number of firms set up impact funds after starting off by focusing on ESG factors within their portfolio companies. A good example is KKR; they’ve had a great ESG team for a number of years and then decided to move into the impact space. Of course, there are also many private equity firms with ESG teams that have chosen (at least for now) not to launch impact funds. It’s not always the next step.

I think a trend that has yet to play out is whether ESG and impact are handled by the same team or two separate teams. Carlyle has two different teams, as does Bain Capital, but some firms are grouping the two together. My impression is that they require different skillsets, so there will more commonly be two teams, but these teams will hopefully work closely together and share knowledge.

We know that the current lack of standardised ESG measurement and reporting is a challenge in that space. Given how recently and quickly impact investing has blossomed, paired with the broad scope of ‘impact’ as a concept, impact investing must face similar measurement hurdles. How best can we measure impact?

Absolutely, it is a challenge. As you say, there are a lot of firms that have just moved into impact investing, so measurement of impact is still developing. I think a key factor is GPs and LPs becoming more educated in this space to determine exactly what they want measured on the impact side and, most importantly, why.

I think the priority in measurement has to be consistency. LeapFrog, for instance, has a target number of emerging consumers that we want to reach with each new fund. Over time, we quantify the people reached by the companies we invest in and think about it at a fund level. This is done consistently across all funds. It provides a great way for LPs to understand how LeapFrog thinks about our funds’ impact.

Below that we also have a number of measures that are specific to the particular sector, such as healthcare. Take a health insurance policy for example, we look at renewal rates – both in terms of profitability (since it’s much easier to continue servicing an existing customer than go and get a new one) and also because renewal means customers are understanding and finding benefit from the policies. We also track claims ratios because we want to ensure there is sufficient and timely payout. If a customer dies, for example, we want to know that their family receives the money they’re due to, let’s say, cover funeral costs or pay for a child’s education. How they spend the payout is of course out of our control, but we want to know that they have it for when they need it.

You mentioned the importance of consistent measures to enable comparison of different impact funds. What about comparisons between different impact fund managers?

There’s definitely a challenge there, given the lack of industry-standardised measurement criteria. I think the SDGs really help with this. By the nature of the work we do at LeapFrog, we focus on a select few of the SDGs. Thinking about how managers are categorised within the SDG framework is helpful because if an investor is really interested in climate change, for example, then LeapFrog isn’t the best choice for them because that isn’t our main impact focus.

There is a general perception regarding a trade-off between impact and profit. Thinking seems to be shifting on this, but does it remain an issue? Will it change over time?

The trade-off question is one we get a lot. What I’m excited about is the fact that more and more traditional investment managers have moved into this space. This offers reassurance to the mainstream that there doesn’t need to be a trade-off. We certainly don’t see one; in fact, we see a synergy.

I can’t speak to all sectors, but within financial services and healthcare, the more people you reach, the more high quality, affordable services and products you provide them with. That is clear profit as well as being positive for society. As I mentioned earlier, we’ve always used the term “profit with purpose”, so our focus has always been on delivering both on the financial side and the impact side.

Given this is such a new area, there aren’t that many data points out there in terms of exits or even investments into companies in this space. Over time, as more data becomes available, we’ll have more evidence to reassure investors that positive impact and positive financial returns are possible to achieve simultaneously.

Where do you believe are the major growth areas for impact investing, both in terms of geographical hotspots and specific sectors?

I think impact investing is really a global trend but emerging markets are a major focus, especially given the sheer number of people in these markets. Younger people still in the workforce are particularly significant as they try to work their way out of poverty and into the middle class. The growing ability to reach these groups of people through access to technology is a really exciting trend. Taking financial services as an example, in the past if someone in one of these emerging markets wanted to transfer money to a family member elsewhere, they would have to go into a bank building some distance away, taking time away from work to get there. There would also be higher costs associated with the bank branch set-up, paying employees and so on. Whereas now you have online money transfer services such as WordRemit, which is a portfolio company of LeapFrog.

We’re also seeing growth in products and services specifically targeted at women, and there are a lot of development funds out there that support female entrepreneurs and female venture capitalists.

Food is another big theme. In Europe, in Scandinavia in particular, there’s a lot of interesting work going on around food at the moment – the shift from meat to more plant-based foods. Healthy eating and nutrition represent a $702 billion market opportunity, while the global sustainable seafood market was valued at $13 billion in 2017 and has been projected to experience a compound annual growth rate of 5% from 2018 to 2025.

How do you see impact investing changing in the next 10 years?

I think the impact investment world will continue to expand in terms of what could be considered within this category. For example, the move towards eating less meat: people might not have thought about this as an impact investing opportunity previously. Impact investing is set to keep growing in terms of the sectors and geographies that it touches.

What else? As we’ve already discussed, more impact investment data will become available over time and there is sure to be greater consensus around measurement. I also expect there to be an industry body that regulates impact investing/measurement and requires third party auditors. Indeed, we’re already starting to see impact-focused auditors entering the space. As per the wider industry, I think regulation will get more rigorous over time.

You touched upon impact funds focused on women. We’re also aware that female players have been a real driving force in the impact investing market as a whole. In your view, is the growth of impact investing helping advance women to leadership positions in an industry where they have been traditionally under-represented?

Yes, there is a lot of research on this actually. For example, Russell Reynolds just published a report on the topic and they found that impact investors are significantly more gender diverse than their counterparts in the broader asset management industry. 39% of senior impact investing decision-makers are female versus only 4% in wider industry. If you look at Blackstone and Carlyle, those heads of impacts are females. This is a space where women seem to be speaking and, yes, taking more of a leadership role.

I would be interested to know whether there is a pay gap issue in terms of impact investment leaders being paid less than their traditional counterparts. I am not sure on that but would like to learn more. In any case, I do think it’s continuing to evolve. EMPEA recently launched a working group aimed at addressing the gender gap in emerging market private equity: the EMPEA Gender Parity Acceleration Working Group. The Head of Communications at LeapFrog is one of the co-heads of that working group, and there a number of leading institutions involved too.

Could you finish by telling us a little more about LeapFrog and its future plans?

Looking to the longer term, our goal at LeapFrog is to reach one billion emerging consumers with essential services by 2030. In terms of our more immediate priorities, earlier this year we closed a $740 million fund – the largest fund raised by a dedicated impact manager. With that we’re targeting robust returns and a reach of 70 million emerging consumers. Our current focus is on swiftly deploying that and ensuring we deliver on what we’ve promised to our investors.

Get in touch

Clare Murray
Associate Director, Strategy
LeapFrog Investments
E:  [email protected]
T: +44 750 224 8143
 

Emmanuelle Dotezac
Director, Funds & Private Wealth
IQ-EQ
E: [email protected]
T: +44 7398 136 790

Tom Miller
Director, Funds
IQ-EQ
E: [email protected]
T: +44 20 7397 5529